HISTORICAL BACKGROUND

Endowed with gold and oil palms and situated between the trans-
Saharan trade routes and the African coastline visited by successive
European traders, the area known today as Ghana has been involved in all
phases of Africa's economic development during the last thousand years.
As the economic fortunes of African societies have waxed and waned, so,
too, have Ghana's, leaving that country in the early 1990s in a state of
arrested development, unable to make the "leap" to Africa's
next, as yet uncertain, phase of economic evolution.

As early as the thirteenth century, present-day Ghana was drawn into
long-distance trade, in large part because of its gold reserves. The
trans-Saharan trade, one of the most wide-ranging trading networks of
pre-modern times, involved an exchange of European, North African, and
Saharan commodities southward in exchange for the products of the
African savannas and forests, including gold, kola nuts, and slaves.
Present-day Ghana, named the Gold Coast by European traders, was an
important source of the gold traded across the Sahara. Centralized
states such as Asante controlled prices by regulating production and
marketing of this precious commodity. As European navigational techniques
improved in the fifteenth century, Portuguese and later Dutch and
English traders tried to circumvent the Saharan trade by sailing
directly to its southernmost source on the West African coast. In 1482
the Portuguese built a fortified trading post at Elmina and began
purchasing gold, ivory, and pepper from African coastal merchants.

Although Africans for centuries had exported their raw
materials--ivory, gold, kola nuts--in exchange for imports ranging from
salt to foreign metals, the introduction of the Atlantic slave trade in
the early sixteenth century changed the nature of African export
production in fundamental ways. An increasing number of Ghanaians sought
to enrich themselves by capturing fellow Africans in warfare and selling
them to slave dealers from North America and South America. The slaves
were transported to the coast and sold through African merchants using
the same routes and connections through which gold and ivory had
formerly flowed. In return, Africans often received guns as payment,
which could be used to capture more slaves and, more importantly, to
gain and preserve political power.

An estimated ten million Africans, at least half a million from the
Gold Coast, left the continent in this manner. Some economists have
argued that the slave trade increased African economic resources and
therefore did not necessarily impede development, but others, notably
historian Walter Rodney, have argued that by removing the continent's
most valuable resource--humans--the slave trade robbed Africa of unknown
invention, innovation, and production. Rodney further argues that the
slave trade fueled a process of underdevelopment, whereby African
societies came to rely on the export of resources crucial to their own
economic growth, thereby precluding local development of those
resources. Although some scholars maintain that the subsequent economic
history of this region supports Rodney's interpretation, no consensus
exists on this point. Indeed, in recent years, some historians not only
have rejected Rodney's interpretation but also have advanced the notion
that it is the Africans themselves rather than an array of external
forces that are to blame for the continent's economic plight.

When the slave trade ended in the early years of the nineteenth
century, the local economy became the focus of the so-called legitimate
trade, which the emerging industrial powers of Europe encouraged as a
source of materials and markets to aid their own production and sales.
The British, in particular, gained increasing control over the region
throughout the nineteenth century and promoted the production of palm
oil and timber as well as the continuation of gold production. In
return, Africans were inundated with imports of consumer goods that,
unlike the luxuries or locally unavailable imports of the trans-Saharan
trade, quickly displaced African products, especially textiles.

In 1878 cacao trees were introduced from the Americas. Cocoa quickly
became the colony's major export; Ghana produced more than half the
global yield by the 1920s. African farmers used kinship networks like
business corporations to spread cocoa cultivation throughout large areas
of southern Ghana. Legitimate trade restored the overall productivity of
Ghana's economy; however, the influx of European goods began to displace
indigenous industries, and farmers focused more on cash crops than on
essential food crops for local consumption.

When Ghana gained its independence from Britain in 1957, the economy
appeared stable and prosperous. Ghana was the world's leading producer
of cocoa, boasted a well-developed infrastructure to service trade, and
enjoyed a relatively advanced education system. At independence,
President Kwame Nkrumah sought to use the apparent stability of the
Ghanaian economy as a springboard for economic diversification and
expansion. He began process of moving Ghana from a primarily
agricultural economy to a mixed agricultural-industrial one. Using cocoa
revenues as security, Nkrumah took out loans to establish industries
that would produce import substitutes as well as process many of Ghana's
exports. Nkrumah's plans were ambitious and grounded in the desire to
reduce Ghana's vulnerability to world trade. Unfortunately, the price of
cocoa collapsed in the mid-1960s, destroying the fundamental stability
of the economy and making it nearly impossible for Nkrumah to continue
his plans. Pervasive corruption exacerbated these problems. In 1966 a
group of military officers overthrew Nkrumah and inherited a nearly
bankrupt country.

Since then, Ghana has been caught in a cycle of debt, weak commodity
demand, and currency overvaluation, which has resulted in the decay of
productive capacities and a crippling foreign debt. Once the price of
cocoa fell in the mid-1960s, Ghana obtained less of the foreign currency
necessary to repay loans, the value of which jumped almost ten times
between 1960 and 1966. Some economists recommended that Ghana devalue
its currency--the cedi-- to make its cocoa price more attractive on the
world market, but devaluation of the cedi would also have rendered loan
repayment in United States dollars much more difficult. Moreover, such a
devaluation would have increased the costs of imports, both for
consumers and nascent industries.

Until the early 1980s, successive governments refused to devalue the
currency (with the exception of the government of Kofi A. Busia, which
devalued the cedi in 1971 and was promptly overthrown). Cocoa prices
languished, discouraging cocoa production altogether and leading to
smuggling of existing cocoa crops to neighboring countries, where francs
rather than cedis could be obtained in payment. As production and
official exports collapsed, revenue necessary for the survival of the
economy was obtained through the procurement of further loans, thereby
intensifying a self-destructive cycle driven by debt and reliance on
vulnerable world commodity markets.

By the early 1980s, Ghana's economy was in an advanced state of
collapse. Per capita gross domestic product (
GDP) showed negative growth throughout the 1960s and
fell by 3.2 percent per year from 1970 to 1981. Most important was the
decline in cocoa production, which fell by half between the mid-1960s
and the late 1970s, drastically reducing Ghana's share of the world
market from about one-third in the early 1970s to only one-eighth in
1982-83. At the same time, mineral production fell by 32 percent; gold
production declined by 47 percent, diamonds by 67 percent, manganese by
43 percent, and bauxite by 46 percent. Inflation averaged more than 50
percent a year between 1976 and 1981, hitting 116.5 percent in 1981.
Real minimum wages dropped from an index of 75 in 1975 to one of 15.4 in
1981. Tax revenue fell from 17 percent of GDP in 1973 to only 5 percent
in 1983, and actual imports by volume in 1982 were only 43 percent of
average 1975-76 levels. Productivity, the standard of living, and the
government's resources had plummeted dramatically.

In 1981 a military government under the leadership of Flight
Lieutenant Jerry John Rawlings came to power. Calling itself the
Provisional National Defence Council (PNDC), the Rawlings regime
initially blamed the nation's economic problems on the corruption of
previous governments. Rawlings soon discovered, however, that Ghana's
problems were the result of forces more complicated than economic abuse.
Following a severe drought in 1983, the government accepted stringent
International Monetary Fund ( IMF) and World Bank loan conditions and
instituted the Economic Recovery Program (ERP).

Signaling a dramatic shift in policies, the ERP fundamentally changed
the government's social, political, and economic orientation. Aimed
primarily at enabling Ghana to repay its foreign debts, the ERP
exemplified the structural adjustment policies formulated by
international banking and donor institutions in the 1980s. The program
emphasized the promotion of the export sector and an enforced fiscal
stringency, which together aimed to eradicate budget deficits. The PNDC
followed the ERP faithfully and gained the support of the international
financial community. The effects of the ERP on the domestic economy,
however, led to a lowered standard of living for most Ghanaians.